Earlier this week, Daniel Drezner gave his book-of-the-month recommendation, the theme being the benefits from free-trade policies.
So, this month's IR book is The United States and the World Economy: Foreign Economic Policy for the Next Decade, edited by C. Fred Bergsten of the Institute for International Economics...
Of particular interest was the chapter by Scott C. Bradford, Paul L. E. Grieco, and Gary Clyde Hufbauer on "The Payoff from Global Integration," in which the authors put a dollar value on the return from past and future trade expansion. Using different methods of estimation, they estimate that the cumulative payoff from trade liberalization since the end of the Second World War ranges between $800 billion to $1.45 trillion dollars per year in added output. This translates into an added per capita benefit of between $2,800 and $5,000—or, more concretely, an addition of somewhere between $7,100 and $12,900 per American household.
If this topic is on your watch list, and you have some tolerance for discussions of econometric methodology, you might also check out "Do Free Trade Agreements Actually Increase Members' International Trade?" by Scott Baier and Jeffrey Bergstrand (published by the Federal Reserve Bank of Atlanta.)
In a nutshell, Baier and Bergstrand note, as an example, that two countries with significant regulatory burdens in their domestic markets may find that the marginal returns to free trade arrangements are particularly large:
In support of this argument, numerous authors have noted that one of the major benefits of regionalism is the potential for “deeper integration.” Lawrence (1996, p. xvii) distinguishes between “international policies” that deal with border barriers, such as tariffs, and “domestic policies” that are concerned with everything “behind the nation’s borders, such as competition and antitrust rules, corporate governance, product standards, worker safety, regulation and supervision of financial institutions, environmental protection, tax codes ...” and other national issues... He argues that in many cases, [free trade] “agreements [FTA] are also meant to achieve deeper integration of international competition and investment” (p. 7). Gilpin (2000) echos this argument: “Yet, the inability to agree on international rules or to increase international cooperation in this area has contributed to the development of both managed trade and regional arrangements” (p. 108; italics added). Preeg (1998) concludes:
[Free] trade agreements over time, however, have tended to include a broader and broader scope of other trade-related policies. This trend is a reflection, in part, of the fact that as border restrictions [tariffs] are reduced or eliminated, other policies become relatively more important in influencing trade flows and thus need to be assimilated in the trade relationship.
Methodologically, the issue is that free trade agreements are often implemented precisely because some institutional features of the country are otherwise inhibiting economic activity. The failure to account for this type of (unobserved) correlation can lead statisticians to understate the benefits of these agreements.
The conclusion?
The purpose of this paper was to answer the question posed in the title: Do free trade agreements increase members’ international trade?...
Our answer to the question is: yes!...
Stated succinctly, this estimate [from our preferred specification] suggests that FTA will on average increase two member countries’ trade about 86 percent after 15 years... This is six times the effect estimated using [standard techniques].
The enhanced estimate of trade flows does not, of course, answer the relevant welfare question. On that we are referred to Professor Drezner's recommendation.
Note: The papers referenced above are
Gilpin, Robert. The Challenge of Global Capitalism. Princeton, NJ: Princeton University Press, 2000.
Lawrence, Robert Z. “Comment on ‘The Role of History in Bilateral Trade Flows’.” In The Regionalization of the World Economy, edited by Jeffrey A. Frankel. Chicago: The University of Chicago Press, 1998, 57- 59.
Preeg, Ernest H. From Here to Free Trade. Chicago: The University of Chicago Press, 1998.